We discuss almost endlessly in this forum how to allocate our financial assets and the various market risks. But really, any broadly diversified portfolio, if held long-term and rebalanced, is pretty safe in the sense that a catastrophic market loss is effectively impossible.

Discussed much less is the potential for a catastrophic loss via fraud (e.g., identity theft or massive breach). Unless your money is held by a bank, there is no guarantee that you will be reimbursed in the event of such a loss. Some companies have "guarantees" but they are accompanied by much small print and wiggle room. Some thought will reveal that brokerages do not even have the assets or insurance coverage to cover a massive breach. This has, in my mind, surfaced as the investor's most underappreciated and potentially catastrophic risk. Yes, it is certainly wise to use strong and diverse passwords, 2FA, and any other security tools available. But at the end of the day, we cannot completely protect ourselves, and our money is at risk of catastrophic loss. I am profoundly concerned about this, since many here are approaching or are in retirement and do not have the capability to recover from a catastrophic loss. Has anyone really thought this through and come-up with any potential solutions (beside putting all of one's money in banks)?

I've though about this, and a Vanguard officer was just recently quoted as this issue of security being what primarily keeps him up at night. Unfortunately, it is not as simple as keeping your physical stock certificate in your security deposit box at the bank.

I have to imagine that a majority of Vanguard resources are put to use in redundancies and protection of data and assets. As far as my personal brokerage, I am not sure what their security measures are...

As a senior retiree, I am also very concerned about "Personal Black Swans, however. . . of the less digital type.
Personal Black Swans that should be prepared for:
Health catastrophe.
Health issues requiring long term expensive care.
Failure to re-re-relaunch issues should any launched birds fail to thrive.
Litigation.
Fallout from who knows where or what.
etc
etc.

There are probably many, many more that I didn't list. These are in no particular order whatsoever. They range in likelihood from low-probability to absurdly-low-probability, but all have a finite, nonzero probability. One can try to fret about black swan risks, insure against some, try to protect against some, and so forth - but ultimately there will always be residual black swan risks.

The probability of each black swan is fairly low in terms of a percent chance of it happening. However, what do you think the total probability of any black swan happening in your lifetime is? 1%? 5%? It's always amusing when people claim that their simulations showed a 100% probability of success or claim that certain assets earn the "risk-free" rate. There's a ~99 or so % chance of success (or whatever it may be) and there's always a minimal risk that even supposedly "risk-free" assets loose money.

Maybe crossing one's fingers and/or practicing denial is a strategy. Maybe honestly facing the fact that there are never any guarantees in life, and being flexible enough to deal with whatever happens, is a better strategy. Maybe combining this with reasonable preparation or positioning to reduce risks of black swans and impacts if black swans occur could be the most reasonable strategy.

That being said, never loosing sight of the fact that black swans are by nature often supposed to be unexpected and unable to be anticipated is important. There are unknown unknowns. Focusing on the things that one can control is probably most important in my opinion. Stocks have declined by 50-90% in major bubbles in the past - that wouldn't be a black swan, it is more a "known known" possible outcome. Reducing this risk through diversification among asset classes is something that one can control.

Most of those aren't black swans at all - and that is an important distinction. One can make plans to directly mitigate identify theft and lawsuits (such as umbrella insurance or other insurance products) and one can calculate the cost/benefit associated with it. One key lesson from Taleb's coining of black swans was that a lot of what we throw our hands up and call black swans are really not and moving them from 'black swans' to swans we know how to address is critical to effective risk management.

On the other hand one cannot meaningfully plan specifically for a nuclear war or revolution but one can build resilience into their lives to broadly enable them to address (and potentially benefit) from black swans.

From the look and time, I’d say it was the Russian Exchange....went to zero

The Panics of the late 1800’s in the US were quite severe, but didn’t go to zero, the drop in 1907 had some real effects as well; we just seem to focus on the Great Depression and forget that other shocks had significant effects on the general population

Last edited by Nestegg_User on Sun Nov 12, 2017 2:10 pm, edited 1 time in total.

Most of those aren't black swans at all - and that is an important distinction. One can make plans to directly mitigate identify theft and lawsuits (such as umbrella insurance or other insurance products) and one can calculate the cost/benefit associated with it. One key lesson from Taleb's coining of black swans was that a lot of what we throw our hands up and call black swans are really not and moving them from 'black swans' to swans we know how to address is critical to effective risk management.

On the other hand one cannot meaningfully plan specifically for a nuclear war or revolution but one can build resilience into their lives to broadly enable them to address (and potentially benefit) from black swans.

Sure you can plan for a nuclear war. Have you seen the guys buying apartments in old missile silos?:) If you want to look at personal level you could classify a lot of things as black swans (rare events, not really predicable, life is totally different before or after) like having a stroke or a car accident where you end up as a paraplegic. Sure on a society level those are events that happen but that is a lot different then them happening to you.

As far the OP concern, how many stories have you heard about this every happening? While on one hand being hard to imagine is part of what makes something a black swan, but you have imagine vanguard (and everyone else) and safety protocols in place to notice abnormal asset transfers.Even if you had every username, password, and the like for every vanguard account, transferring all that money out without causing issues isn't going to be trivial when you are trying to suck out say 10 billion dollars.

I think (rather than asteroids), the black swan is related to catastrophic failure of Vanguard's IT.
THere have been innumerable posts about poor IT and poor service from Vanguard. When reading them, it usually indicates a systemic failure at the leadership level to take these things seriously. There is potential for a poor outcome because of this. Suprirsed Vanguard leadership hasnt addressed it.

I think a major medical condition that causes you to lose your income is a more realistic threat to working age people. I have seen people struck down early by stroke, cancer, brain damage, seizures, Parkinson's, mental illness, addiction, and injury.

It is straightforward to hold your assets at a few different banks and investment companies.

Seems to be a reasonable precaution to take in the event one financial institution is breached or if you are hit by identity theft (in the hopes that the thieves target one account but not all).

There are threads about how to simplify your portfolio, banks, etc, both for ease in dealing with finances when you "age" and for making it easy for your spouse to deal with when you are gone. The spreading of assets as described here is at variance with what shows up in those threads, but nevertheless seems to make some sense.

It is straightforward to hold your assets at a few different banks and investment companies.

Seems to be a reasonable precaution to take in the event one financial institution is breached or if you are hit by identity theft (in the hopes that the thieves target one account but not all).

There are threads about how to simplify your portfolio, banks, etc, both for ease in dealing with finances when you "age" and for making it easy for your spouse to deal with when you are gone. The spreading of assets as described here is at variance with what shows up in those threads, but nevertheless seems to make some sense.

I've been an advocate of simplifying -- one bank, one broker -- in the past but all the hacks recently have changed my perspective.

The key is to find the sweet spot, not spreading your money across too many institutions but using a few. Two banks and 2 or 3 investment firms seems about right, at least for us,

...But really, any broadly diversified portfolio, if held long-term and rebalanced, is pretty safe in the sense that a catastrophic market loss is effectively impossible...

Nope. It's possible.

Was that equity investor exhibiting home bias if their portfolio went to zero? Imagine if they held US equities, say. Perhaps if they held their foreign assets outside of their home country (whichever one that happened to be ) in 1918 then their wealth wouldn't have crashed.

In fact don't these graphs prove the OP's point rather well, just more broadly?

"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

Since so many (all) of our finances are tied into a system where we do not even have any physical possesion of our wealth/money, all it takes is a big problem with the grid to create a black swan.
Look at Puerto Rico. No electric. You could, on paper have a lot of money, your emergency money, but it would not be in available to you.
Maybe not a personal black swan to us on the mainland, but to Puerto Ricans, very much so.
A black swan event does not have to last forever. It does not have to be all encompassing. Still could be a black swan event.

Most of those aren't black swans at all - and that is an important distinction. One can make plans to directly mitigate identify theft and lawsuits (such as umbrella insurance or other insurance products) and one can calculate the cost/benefit associated with it. One key lesson from Taleb's coining of black swans was that a lot of what we throw our hands up and call black swans are really not and moving them from 'black swans' to swans we know how to address is critical to effective risk management.

On the other hand one cannot meaningfully plan specifically for a nuclear war or revolution but one can build resilience into their lives to broadly enable them to address (and potentially benefit) from black swans.

Agree with avalpert that we are generally using the term "black swan" incorrectly. A black swan is an "unknown unknown." Any risk we can identify is not a black swan by definition.

Avalpert is correct too in that everyone should be cognizant of basic risk management theory and practice.

A risk severity is the risk probability of occurrence times the risk impact. We should address those risks with the highest severity through acceptance, avoidance, transfer, or mitigation.

Purchasing insurance is transferring a risk to an insurance company.

As far as the risk of identity theft causing the loss of money in a brokerage account, there seems to be at least a few companies that offer identity theft insurance. Some of the companies looked at through a quick google search offer $1MM of insurance. I'm hoping that more insurance companies will be willing to underwrite this risk at a reasonable cost in the near future. I would be a buyer at some point for the peace of mind.

In the meantime - keep changing and using strong passwords. It might be wise as others have suggested to use multiple brokerages and stay under the FDIC insurance maximums at banks.

Look at the time period (early 1900’s), I’d imagine that the vast majority of individuals in the US at that time would not have had access to foreign stocks at any reasonable cost and the same would have been likely for many foreign investors at the time (if they even cared for US stocks at the time, as it would have been considered more an emerging market then).

Even more recently, how likely would the average Argentinian been able to access foreign markets in the 80-90’s before their crash or in today’s market how likely are Venezuelans able to get foreign stocks?

From the look and time, I’d say it was the Russian Exchange....went to zero.

I do not consider that a broadly diversified portfolio - as I specified.

(Shrug) Yes. That's a fair criticism of what I said.

I was thinking of "diversified" in the older meaning of "invested in the stocks of many different industries" but, yes, nowadays it is understood to mean "internationally diversified" as well. And regardless of conditions in the past it's trivially easy to be internationally diversified today.

I don't think it was as hard in the past as people think. I've found evidence that there were perfectly good international stock mutual funds in the 1970s and their expense ratios, while outrageously high by Boglehead standards, were not that much higher than for most other mutual funds of the era. And in A Christmas Carol, Dickens speaks disparagingly of "a mere United States security" as the emblem of something unreliable and unsound, so obviously the class of Englishmen who invested, were familiar with investing in the United States. Of course, in the United States, investing in the stock market at all was not something that was easy for ordinary people to do until just after World War I, when it became a craze. (Before that there had been "bucket shops," gambling parlors with stock tickers where people placed bets on stock movements, but no money was actually invested and no shares of stock were actually bought or sold.)

Last edited by nisiprius on Mon Nov 13, 2017 8:56 am, edited 1 time in total.

From the look and time, I’d say it was the Russian Exchange....went to zero.

I do not consider that a broadly diversified portfolio - as I specified.

(Shrug) It's a fair criticism. I was thinking of "diversified" in the older meaning of "invested in the stocks of many different industries" but, yes, nowadays it is understood to mean "internationally diversified" as well. And regardless of conditions in the past it's trivially easy to be internationally diversified today.

I don't think it was as hard in the past as people think. I've found evidence that there were perfectly good international stock mutual funds in the 1970s and their expense ratios, while outrageously high by Boglehead standards, were not that much higher than for most other mutual funds of the era. And in A Christmas Carol, Dickens speaks disparagingly of "a mere United States security" as the emblem of something unreliable and unsound, so obviously the class of Englishmen who invested, were familiar with investing in the United States. Of course, in the United States, investing in the stock market at all was not something that was easy for ordinary people to do until just after World War I, when it became a craze. (Before that there had been "bucket shops," gambling parlors with stock tickers where people placed bets on stock movements, but no money was actually invested and no shares of stock were actually bought or sold.)

Here's the thing with international diversification: sometimes it works, and sometimes it doesn't.

Would international diversification have helped a Japanese investor after the 1990 crash? Yes. A lot.
Would international diversification have helped a Russian investor after the 1918? Probably not.

Essentially, international diversification helps partially protect against the possibility that one's home country market will substantially underperform international markets despite governmental and societal stability. It does not really help in situations where true black swans occur and governments fall, wars occur, or private property rights are unforeseeably disregarded.

Also - remember that in a thread about unknown unknowns, no one can reasonably foresee what could happen. The goal isn't to work really hard and somehow foresee these unknown unknowns. While this is good, some things are by definition unknowable.

The goal is to find portfolio strategies that allow one to build into one's investments flexibility and resilience. The "don't have more than FDIC limits in one bank" idea is very reasonable to me. Another one is the "multiple brokerages/banks" idea.

It is straightforward to hold your assets at a few different banks and investment companies.

Seems to be a reasonable precaution to take in the event one financial institution is breached or if you are hit by identity theft (in the hopes that the thieves target one account but not all).

There are threads about how to simplify your portfolio, banks, etc, both for ease in dealing with finances when you "age" and for making it easy for your spouse to deal with when you are gone. The spreading of assets as described here is at variance with what shows up in those threads, but nevertheless seems to make some sense.

I've been an advocate of simplifying -- one bank, one broker -- in the past but all the hacks recently have changed my perspective.

The key is to find the sweet spot, not spreading your money across too many institutions but using a few. Two banks and 2 or 3 investment firms seems about right, at least for us,

This number of banks and investment firms seems roughly reasonable to me - with the caveat that I would feel having at least one of the banks be a local brick-and-mortar demand deposit account, where a real person can be talked to at a any time, would be helpful. Could simplification be done by having one firm hold Total Stock and another firm hold Total International, or something similar to that?

It is straightforward to hold your assets at a few different banks and investment companies.

Seems to be a reasonable precaution to take in the event one financial institution is breached or if you are hit by identity theft (in the hopes that the thieves target one account but not all).

Bernstein's Deep Risks is a worthwhile book. If you have more than enough, why not take additional diversification steps.
In addition to multiple custodians, parking some of your assets off-shore in either real estate or financial accounts in another stable economy is a relatively underutilized approach that is available.

It is straightforward to hold your assets at a few different banks and investment companies.

Seems to be a reasonable precaution to take in the event one financial institution is breached or if you are hit by identity theft (in the hopes that the thieves target one account but not all).

Bernstein's Deep Risks is a worthwhile book. If you have more than enough, why not take additional diversification steps.
In addition to multiple custodians, parking some of your assets off-shore in either real estate or financial accounts in another stable economy is a relatively underutilized approach that is available.

Seems to be a hard thing to do now without risking running afoul of US law.

While we are talking about "diversification" do some of you own funds from more than one company. Should we split our Total Stock Market investment into two slices, one from Vanguard (VTI) and one from IShares or Fidelity? I know almost all of my money is in Vanguard funds held and tracked by two separate brokerages and two brokerage accounts.

Think about what happened to the people in Greece since 2009? The peoples savings accounts were locked up and they could not withdrawn cash or move money out of the country or buy stuff they needed. Current spending was stopped to pay for over spending by the government in previous decades. So everyone slowly went broke as the country crashed and unemployment skyrocketed. It was a mess and is still not recovered. A very similar situation occurred in Russia from 1988-1995. Things like this can happen in any country.

It is straightforward to hold your assets at a few different banks and investment companies.

Seems to be a reasonable precaution to take in the event one financial institution is breached or if you are hit by identity theft (in the hopes that the thieves target one account but not all).

Bernstein's Deep Risks is a worthwhile book. If you have more than enough, why not take additional diversification steps.
In addition to multiple custodians, parking some of your assets off-shore in either real estate or financial accounts in another stable economy is a relatively underutilized approach that is available.

Seems to be a hard thing to do now without risking running afoul of US law.

Fewer and fewer jurisdictions will allow US Citizens to open overseas accounts, but some still will. Singapore is probably where I'd go. Just report them all to the IRS to stay on the right side.

While we are talking about "diversification" do some of you own funds from more than one company. Should we split our Total Stock Market investment into two slices, one from Vanguard (VTI) and one from IShares or Fidelity? I know almost all of my money is in Vanguard funds held and tracked by two separate brokerages and two brokerage accounts.

What do you people do?

Ninety percent of our retirement assets are in one of three places -- spouse's 401(k) at major brokerage (no choice as to custodian); my TSP; my IRA at Vanguard.

If you have multiple accounts -- for self, spouse, joint -- I'd split the custodians that way.

My concern is not holding all Vanguard funds, but holding them at a couple different institutions.

Since 40% of Americans are obese, the majority have poor diet and exercise habits, and the main causes of death are cardiovascular and immune system rleated, I would venture to say the personal "Black Swan" for most people is their health. I recommend reading The Science of Fear.

Since 40% of Americans are obese, the majority have poor diet and exercise habits, and the main causes of death are cardiovascular and immune system rleated, I would venture to say the personal "Black Swan" for most people is their health. I recommend reading The Science of Fear.

Since 40% of Americans are obese, the majority have poor diet and exercise habits, and the main causes of death are cardiovascular and immune system rleated, I would venture to say the personal "Black Swan" for most people is their health. I recommend reading The Science of Fear.

Since 40% of Americans are obese, the majority have poor diet and exercise habits, and the main causes of death are cardiovascular and immune system rleated, I would venture to say the personal "Black Swan" for most people is their health. I recommend reading The Science of Fear.

In absolutely no way is that a black swan - that isn't even a gray swan. That is an easily modelable white swan risk that they should have no excuse for not managing against.

Unfortunately, for many it is a black swan as there is a lot of denial around high probability/high impact events versus low(er) probability/high impact events (i.e., it's more likely an individual who has failed to devote sufficient attention to health will encounter life-threatening disease, yet it's easier to worry about imagined versus real threats). It's human nature to fail to distinguish between worry and fear. Worry over imagined threats distorts our view of real, more likely threats because worry is an activity while fear moves us to action (e.g., a heart attack moves us to take action both physically and cognitively).

Another eye-opening book worth reading on this subject (particularly if you are female) is The Gift of Fear.

Since 40% of Americans are obese, the majority have poor diet and exercise habits, and the main causes of death are cardiovascular and immune system rleated, I would venture to say the personal "Black Swan" for most people is their health. I recommend reading The Science of Fear.

In absolutely no way is that a black swan - that isn't even a gray swan. That is an easily modelable white swan risk that they should have no excuse for not managing against.

Unfortunately, for many it is a black swan as there is a lot of denial around high probability/high impact events versus low(er) probability/high impact events (i.e., it's more likely an individual who has failed to devote sufficient attention to health will encounter life-threatening disease, yet it's easier to worry about imagined versus real threats). It's human nature to fail to distinguish between worry and fear. Worry over imagined threats distorts our view of real, more likely threats because worry is an activity while fear moves us to action (e.g., a heart attack moves us to take action both physically and cognitively).

Another eye-opening book worth reading on this subject (particularly if you are female) is The Gift of Fear.

Denial and lack of worry over highly probable events don't make them black swans - quite the opposite. And conflating them does a disservice to both - it doesn't make it more likely they will take them seriously or take the mitigating steps to reduce the risk when you lump them in with a group for which there are no mitigating steps to take.

From the look and time, I’d say it was the Russian Exchange....went to zero

When I first looked at the picture I thought it looked like the old Stock Exchange in St. Petersburg, Russia. I've been to St. Petersburg twice. My hunch was reinforced by the fact that there was a large anchor in front and that building is now the Navy Museum. But I have to admit that I checked it out first on the internet and verified my hunch before I wrote this. Maybe that's not surprising for a conservative 40/56/4 BH investor. Hope the NYSE never has to become a museum.

But at the end of the day, we cannot completely protect ourselves, and our money is at risk of catastrophic loss.

The OP seems mostly concerned with fraud/theft. Subsequent posts expanded it to various forms of apocalypse. If fraud/theft is the big concern, I think about all you can really do is convert financial assets into real assets which are far harder to steal. I've not heard of fraudulently taking over farmland, your house, or an apartment building, for instance. But for financial assets, I think you are just stuck with the risk. At least you're in good company. This whole board would instantly transform into a support group if something like that happened at Vanguard.

-Physical theft
-Uninsured disaster losses
-Hacking losses
-Conventional war
-Identity Theft
-Lawsuits
-Failure of a brokerage
-Failure of the SIPC
-Failure of the FDIC or a government program
-Global Pandemic
-Divorce costs
-Asteroid impact
-Unexpected personal health crisis
-Nuclear war
-Personal insanity
-Revolution
-Drastic family spending need increases
-Mismanagement of finances by trustees or asset managers
-Accidents
There are probably many, many more that I didn't list.

Those are all white swans. Black swans by definition are extreme, rare events. Therefore no one should lose any sleep over what are essentially white swans.

Don't keep all your eggs in one basket. Hedge against one account or one institution being hacked by having a second account at a second institution. Yes, they could both get hacked, but the risk of that is lower than if you jut have one account at one institution.

The risk just went way up for the last year. It's not just some guy or gal in basement you need to worry about now. Foreign intelligence services from countries like Russia, China and North Korea have entered the game. Intelligence services that have that have had success in penetrating the NSA, CIA,etc.

The North Koreans penetrated the Sony Pictures computers and created havoc. They are also believed to have stolen $81 million from the New York Federal Reserve Bank.

Does Vanguard (or other institutions) have the experience and expertise to stop themselves from being infiltrated by a foreign agent? Or from preventing one of their IT employees from being turned into an agent by blackmail and/or bribery? Is the possibility of either of these happening even on their radar? I'm not convinced it is.

Since 40% of Americans are obese, the majority have poor diet and exercise habits, and the main causes of death are cardiovascular and immune system rleated, I would venture to say the personal "Black Swan" for most people is their health. I recommend reading The Science of Fear.

In absolutely no way is that a black swan - that isn't even a gray swan. That is an easily modelable white swan risk that they should have no excuse for not managing against.

Unfortunately, for many it is a black swan as there is a lot of denial around high probability/high impact events versus low(er) probability/high impact events (i.e., it's more likely an individual who has failed to devote sufficient attention to health will encounter life-threatening disease, yet it's easier to worry about imagined versus real threats). It's human nature to fail to distinguish between worry and fear. Worry over imagined threats distorts our view of real, more likely threats because worry is an activity while fear moves us to action (e.g., a heart attack moves us to take action both physically and cognitively).

Another eye-opening book worth reading on this subject (particularly if you are female) is The Gift of Fear.

Denial and lack of worry over highly probable events don't make them black swans - quite the opposite. And conflating them does a disservice to both - it doesn't make it more likely they will take them seriously or take the mitigating steps to reduce the risk when you lump them in with a group for which there are no mitigating steps to take.

I agree and I take full responsibility for having fallen for the latest fad of using black swan terminology. OTOH, my point is the way humans are wired to view fear is to devote "worry" (an activity) over that which they don't have to take much, if any, action ("black swans") at the expense of taking action to mitigate very real, more likely events (e.g., their diet is killing them minute by minute).

We really don't know whether the internet is robust or fragile, and my black swan nightmare is that something or someone takes it down for more than a couple of days. I don't think people realize just how huge a disruption that would be even if it only lasted a week, and if it were longer - Katie bar the door, literally.

For example, if the net were down I would be surprised if you could purchase food or fuel, even if the tanks and shelves hadn't been emptied. I would be surprised if even accessing local bank safety deposit boxes was possible. And as for the electrons we call our portfolios, forgetaboutit, and it won't matter if you have accounts at multiple brokerages.

Makes me think of Depression-era babies who as geezers kept FDIC insured accounts at multiple banks. If the 'net went down today that might not help though.

Which makes me think Nisi has the right approach - denial.

With one exception: It's probably prudent to keep a few thousand in greenbacks at home, plus enough food and a water source for a month or two, a way to cook it and a backup heat source in cold climates. I worry less about The Big One than about the not-so-big-ones that while they are happening you don't know are not The Big One.

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